US embassy cable - 04GUATEMALA1765

UNCLAS GUATEMALA 001765 
 
SIPDIS 
 
SENSITIVE 
 
TREASURY FOR TOLUI AND PARODI 
 
E.O. 12958: N/A 
TAGS: ETRD, GT, UNCTAD, WTRO 
SUBJECT: TAX COLLECTIONS EXCEED TARGETS THANKS TO PROGRESS 
WITH CUSTOMS REFORM 
 
REF: GUATEMALA 1641 
 
1.  (SBU)  Summary:  Tax collections are above target through 
June, despite delays in the fiscal reform.  The good news 
comes as a result of much better collections by Customs of 
duties and value added tax in the ports, the result of a 
shifting focus from physical inspection of containers to 
ensuring that all containers are systematically tracked. 
This shift in focus augurs well for revenues, combating 
corruption, and removing a key obstacle to more fundamental 
tax reform. 
 
2.  (U)  Superintendent of Tax Administration Willy Zapata 
told the press July 14 that preliminary data on tax 
collection for the first half of 2004 showed that revenues 
were almost 8% over the target, despite the substantial delay 
in passing tax reform and replacing the IEMA alternative 
minimum tax that was declared unconstitutional in December 
2003 (reftel).  The mid year target had been Q 9.3 billion, 
but actual collections were Q10 billion ($1 = approx Q8). 
Zapata was optimistic that the target for the year of Q21 
billion would be reached with the recent replacement of the 
IEMA with the IETAAP. 
 
3.  (SBU)  Zapata's special advisor on Customs Christian Ros 
and Customs Intendent Rodolfo Fernandez told EconCouns and 
Econoff July 7 that collections of duties and value added tax 
on imports had been increasing dramatically and were 
offsetting the revenues lost as a result of the court ruling 
on the IEMA, which took effect in the second quarter of 2004. 
 They said that preliminary information indicated that border 
tax collection for May was some 12% above the amount in May 
2003 and that June collections were up by over 20%.  They 
expected collections to continue to rise as new measures they 
were taking came into effect.  Ros said that under-valuation 
of invoices, the principal focus of the Portillo 
Administration, was not the principal source of tax evasion. 
The greater problem was the complicity of corrupt officials 
in the ports with organized smugglers, allowing containers to 
pass through the ports without a trace.  Ros's priority was 
to ensure that everything coming off or on a ship matched the 
ship's electronic manifest.  Containers leaving the port by 
truck also had to be in the Customs computer.  Smugglers were 
finding that they could not avoid the controls by sneaking 
containers around inspection points, and that was the reason 
collections were up.  His next step would be to ensure, 
through audits, that what is declared on incoming manifests 
matches up with what importers buy, produce and sell. 
 
4.  (SBU)  Comment:  The news is encouraging, for several 
reasons.  First, prospects are looking better for meeting the 
Berger Administration's target of a fiscal deficit no greater 
than 2% of GDP.  Secondly, Ros's approach to customs 
management marks a clear intention to shift from a focus on 
physical inspection, where corrupt customs agents have long 
practiced discretion to ignore what they see, to an 
information and audit based system where evasion and 
under-valuation are difficult.  It not only seems to be 
working by raising more revenues, but it is also better 
attuned to the concepts of business facilitation we are 
promoting in the WTO, FTAA and CAFTA.  Finally, effective and 
efficient management of Customs is something the private 
sector has long been demanding as a condition for significant 
tax reform.  The Portillo Administration, along with some in 
the international community, accused the private sector of 
rejecting its responsibility to pay its fair share of taxes. 
Private sector leaders have responded that they will pay more 
taxes, but not until massive contraband is eliminated and the 
playing field is leveled.  The argument is self-serving, but 
it also has merit.  An effective crackdown on contraband will 
remove the strongest argument that still exists for delaying 
effective fiscal reform. 
WHARTON